Posted: July 7th, 2016

Calculate the Net Present Value of this project using the RADR calculated in Part ?

The initial investment in the project is $45,000. The firm’s cost of capital is 12%, however projects in this risk class have a 14% required rate of return. The risk-free rate is 8%.

Year Cash Inflow
1 $23,000
2 19,000
3 15,000
4 13,000
5 $10,000

1. Use CAPM to calculate the Risk Adjusted Discount Rate to use to evaluate this proposed project.

2. Calculate the Net Present Value of this project using the RADR calculated in Part 1.

This question required that a capital budgeting question to be created and a solution provided for it. The question involved a long-term project that a company is considering investing in. The solution uses two capital budgeting methods, the Payback period method and the Net Present Value method, to come to a decision about whether the firm should invest in the project.

PAYBACK PERIOD METHOD AND NET PRESENT VALUE METHODS OF CAPITAL BUDGETING DEMONSTRATED